All posts tagged Fiscal Policy

Latin America’s reactions to the massive transnational scandals involving the Brazilian construction giant Odebrecht and its subsidiary Braskem are an important sign of progress in anticorruption efforts. But across the region, courts’ reluctance to challenge elites remains a major obstacle to deeper accountability. Brazilian, Swiss, and U.S. authorities’ announcement in December 2016 of a multibillion dollar global corruption settlement with the Brazilian firms – valued at $3.5 to 4.5 billion – was remarkable for being the largest in history. It was also shocking for its revelations: Odebrecht admitted using a variety of elaborate subterfuges to launder bribe payments and corrupt proceeds, including by setting up a bribe department and buying an offshore bank. Graft allowed executives to rewrite laws in their own favor, and guaranteed that the right officials were in the right place when public contracts were up for bidding. The firms netted $3.60 for every $1 they spent on bribes in Brazil, and admitted to paying $788 million in bribes across twelve countries, including ten in Latin America.

The political salience of the charges is roughly similar in all ten Latin countries, muddying the reputations of presidents or former presidents in Argentina, Colombia, the Dominican Republic, Peru, Panama, Venezuela and, of course, Brazil. Ministers and high-level officials have been implicated in the remaining countries: Ecuador, Guatemala, and Mexico. Nearly one year after the settlement, it is time to ask how well law enforcement and judicial processes are resolving the allegations against these high-powered public and private sector elites.

In a paper forthcoming in Daedalus, I argue that accountability can be thought of as the outcome of a basic equation – A = (T + O + S) * (E – D) – combining transparency (T), defined in its most essential sense as public access to information about the government’s work; oversight (O), meaning that government functions are susceptible to surveillance that gives public or private agents the right to intensively evaluate the government’s performance; and sanction (S), effectively punishing wrongdoing and establishing societal norms to their rightful place. These are tempered by institutional effectiveness (E) – understood as the outcome of state capacity, relevant laws and procedures, and citizen engagement – and political dominance (D), which diminishes the incentives for active oversight or energetic sanction. The graph above uses a combination of data points from the World Justice Project to measure each of the five variables.

The comparison yields mixed findings. On average, the nations implicated in the Odebrecht settlement do quite well on transparency, effectiveness, and political dominance – the outcome of a generation of democratic rule (with Venezuela being the obvious outlier). But all ten countries perform comparatively poorly when it comes to oversight, and abysmally when the criterion is sanction. This does not bode well for accountability, especially if we consider that among the Odebrecht Latin Ten, the highest-scoring country on the sanction criteria is Argentina, whose score is still below the middle-income country average. In Brazil, where trial courts have led the way in imposing sanctions on business elites, political leaders are nonetheless protected against meaningful sanctions by an arcane system of privileged standing in the high courts.

Latin American judicial systems – long rigged to protect local economic and political elites – remain the principal obstacle to accountability. The Odebrecht settlement signaled that a new day has arrived: new international norms and law enforcement across multiple jurisdictions are likely to continue to upset the cozy arrangements that have protected the region’s elites from corruption revelations for decades. But true accountability will only come when local courts and prosecutors are empowered to effectively punish corrupt elites. That implies changes in legal procedure, new laws, and most importantly, political will. Perhaps the Odebrecht case will galvanize domestic public opinion and mobilize policymakers about the need to improve local justice systems. The enormous costs of corruption revealed by the Odebrecht settlement suggest that change cannot come soon enough.

November 6, 2017

* Matthew Taylor is Associate Professor at the School of International Service at American University. His forthcoming article in Daedalus is entitled “Getting to Accountability: A Framework for Planning and Implementing Anticorruption Strategies.”

Latin America is undergoing a profound transformation of its social policies and of the very concept of social citizenship, but the outcome of this process is far from certain. Electoral democracy, urbanization, increased educational attainment, and increased exposure to new and broader consumption patterns have destroyed the political foundations for conservative modernization. The turn of the century has witnessed advances in social outcomes and public policies that for the first time provide a true window of opportunity for achieving more productive and egalitarian societies.

Decreasing poverty, lower income inequality, improved and expanded employment, and access to transfers and services to popular sectors were made possible by five critical factors: booming prices for Latin American commodities fueled economic growth and employment; stable prices – a positive legacy of the Washington Consensus era – meant that wages and transfers were not undermined by inflation; increased state fiscal capacity and commitment to social policy enabled a doubling in 15 years of real social per-capita expenditure; a demographic dividend, when combined (the young and the elderly) dependency ratios are lowest as a percentage of the population; and improved education access, completion, and credentials, which facilitated enhanced opportunity and increased productivity.

Yet these five advantages will lose steam in the next couple of decades. Growth will wither as the commodity boom ends and expansionary monetary policy is limited. Most Latin American economies are facing increased inflationary pressures. Existing tax structures and in some cases productivity levels will not permit social expenditure to increase at the rate of the last 15 years. The easy phase of the demographic transition (when dependency rates are going down) is or will be over in most countries towards 2025. Some countries in the region will face the European dilemma of an aging population, but they will do so with a lower GDP per-capita, weaker fiscal capacities of states, and a significantly more unequal income distribution. While the soft targets of expanded education – primary school and expansion of lower middle school – have been achieved, the tough ones remain: extended coverage in early childhood, completion of high school, quality improvement, and true reduction of inequality of outcome in learning.

Five fault lines in Latin American social regimes make these problems a major threat to the sustainability of both social and economic development. A) Women’s incorporation into the labor market remains low (50 percent) and is highly stratified. B) The absence of a robust state-led care system for early childhood and the persistence of a patriarchal distribution of care burdens undermines a route to development that is both more efficient and egalitarian. C) Stark contrasts between insiders and outsiders in informal and formal labor markets and access to social protection and cash transfer systems contribute to an expansionary monetary and fiscal policy that mainly benefits insiders unwilling to be taxed for redistributional public and collective goods and insurance. D) The region’s middle class and new emergent class, moreover, are not willing to increase taxation, since they do not perceive the quality of public goods and collective social services as adequate. And E) the pattern of fertility shows some of the worst patterns in social terms, including that most biological reproduction is left to the poor: Latin American governments do not equalize opportunity early on and through the educational system – which in the most unequal region of the world with diminishing but non-convergent fertility rates – leads to a productivity failure since underinvesting in the poor is underinvesting in the frontier of productivity enhancement.

These challenges will condition the possibility of a new social citizenship and a social investment model based on robust public goods, expansion of merit goods, and universality of entitlements. It is not enough that elites are no longer able to control the political and economic game through status enclosure and authoritarianism. In order to craft truly universal social policies conducive to providing inclusion for all, societies must confront narrow corporatism and restricted targeting – and the political economy they sustain. Contributory models based on formal wages and targeted social policies based on need will not disappear, but they have to take a back seat to a model of basic universalism where access to quality public and collective goods is truly universal, and entitlements in transfers and services are not dependent on need or labor formality. There have been important advances, such as a marked increase in non-contributory systems of cash transfers in terms of pensions and child-family transfers, but the commodity boom and the rise of the emergent and middle classes that drove them are not permanent. A coalition that is willing to forgo private spending power in order to enhance quality of life through collective services is needed. Such a coalition is made conceivable by these political, economic, and social epochal changes, but it is by no means guaranteed. If reforms do not make it a reality, the promise will be shattered, and the pendulum between failed populism, with state-led “Robin Hood” incorporation attempts, and a technocratic closure of democracy and state bashing, will remain the central and tragic dynamic of the region.**

July 18, 2016

*Fernando Filgueira is a Senior Resarcher at the Centro de Información y Estudios del Uruguay (CIESU) and Collaborating Researcher the Economic Commission for Latin America and the Caribbean. He is a member of the International Panel for Social Progress led by Amartya Sen.

**Read the full version of this essay, which is based on research done for the Economic Commission for Latin America and the Caribbean (ECLAC) and for EUROsociAL on social policy, labor dynamics, and demographic change.

What seemed like a certainty less than a year ago – Ecuadorian President Rafael Correa as a shoo-in for reelection in 2017 – now has given way to competing scenarios as the country’s economic crisis deepens. The game-changer has been the collapse in revenues from Ecuador’s principal export: petroleum. With prices for Ecuadorian crude hovering 50 percent below their 2014 average, Correa has had little choice but to slash the abundant government spending that has been the hallmark of his presidency. Ecuador’s use of the U.S. dollar greatly handicaps its capacity to adjust. Further aggravating the recession is the economic downturn of Ecuador’s principal external lender, China. Over $2 billion have been cut from the 2015 budget, and plans to shrink the size of the public bureaucracy are now under way. His decision in April to suspend the central government’s obligatory payments to the national social security system stoked anxiety about the fund’s future, and an announcement in June of plans to hike taxes on inheritance and real estate transactions sparked street demonstrations around the country. Indigenous and labor organizations mobilized in mid-August to protest these and other aspects of Correa’s style of governing. An estimated crowd of 100,000 people marched in Quito. Scores of protestors were detained and face charges related to the August mobilizations.

The months ahead will not be easy for a president accustomed to buoyant budgets and strong polls. As one of Latin America’s left-turn leaders, he pushed a state-centric economic model under which poverty declined and the middle class grew. His approval ratings since he took office in 2007 consistently scored among the highest of any Latin American president. (They dipped below 50 percent – as low as 42 percent – for the first time in 2015.) While Correa waxes and wanes on whether he really will pursue reelection, his party is pushing to amend the Constitution through legislation – without a referendum supported by over 80 percent of the public – to allow him a third term. The opposition strenuously opposes the move. The National Assembly appears headed toward a final vote on the matter in December.

From now until December, the reelection maneuvering and two possible outcomes will dominate conversations. Under one scenario, Correa and Alianza País will push ahead with the amendment, ignoring negative public reaction and repressing protests if necessary, and Correa will decide on his candidacy depending on his view of the economy and the state of the opposition. In a second and perhaps less likely scenario, Correa and his party may just abandon the reelection plan, concluding that the political costs are just too high. This would set off power struggles within Alianza País over who would head the ticket. Among the prospective frontrunners are former Vice President Lenín Moreno, current Vice President Jorge Glas, Production Minister (and former Ambassador to the United States) Nathalie Cely, and former Industry Minister-turned-critic Ramiro González. In the process, Correa will be looking to anoint someone loyal and capable of governing the country until he can return as a candidate in 2021. Under both of these scenarios, Ecuador is bracing for a volatile year ahead. Natural disasters – a possible volcanic eruption of Mount Cotopaxi and El Niño – could also fuel uncertainty, giving Correa a chance to shine and rally, or to fail and deepen doubts about his leadership. After eight years of relative political stability and economic good times, Ecuadorians are pondering whether a post-Correa era could be at hand and what it would mean.

September 8, 2015

* Catherine Conaghan is the Sir Edward Peacock Professor of Latin American Politics at Canada’s Queen’s University and a former CLALS Research Fellow.

From left to right: Aaron Schneider, Maynor Cabrera and Hugo Noe Pino at the June 5 event on Central American fiscal policy.

Economists are warning that Central America – unlike some South American countries and Mexico – has still not rebounded from the 2007 global economic crisis, and that current fiscal policies dim prospects for improvement. After making progress reducing poverty prior to 2007, the subregion has been stymied by static tax policies, insufficient investment in physical infrastructure, corruption, and natural disasters induced by climate change. This is the assessment of Hugo Noe Pino, Ricardo Barrientos and Maynor Cabrera, economists from the Central American Institute on Fiscal Studies (ICEFI), and Aaron Schneider, Professor of Tulane University, who presented their work at a CLALS-sponsored seminar at the Woodrow Wilson Center on June 5.

The specialists’ research indicated that political resistance to fiscal reform is strong and comes from both new and traditional political and economic interests. Elites have not found common ground with the middle and lower class in most of Central America – a key element of Costa Rica’s success prior to the financial crisis. Absent an enduring fiscal pact, countries in the region are likely to remain plagued by persistently slow growth and unusually skewed income distribution.

Violence and security dominate Washington’s agenda on Central America, but this focus largely misses the underlying dynamic between economic decline and crime throughout the subregion. Elites favor policies that discourage effective state‑building – including investment in security forces paid well enough that they are less vulnerable to corruption – and that exacerbate social inequalities. Political fragmentation and low citizen confidence in government institutions have dire consequences for national security, and countries get caught in the Catch‑22 of being unable to attract investment from abroad and encourage development from within as long as fiscal policies fail to promote an educated, healthy and skilled workforce.

CLALS currently has a program investigating how traditional, renewed and emerging elites shape the political and economic landscape of Central America. For more information click here. And click here for a video of the ICEFI presentation and discussion at the Woodrow Wilson Center.